Geoffrey Ngene

Credit Default Swaps and Sovereign Debt Markets

This study investigates the link between price discovery dynamics in sovereign credit default swaps (CDS) and bond markets and degree of financial integration of emerging markets. Using CDS and sovereign bond spreads, the price discovery mechanism was tested using a vector error correction model. Financial integration is measured using news-based methods. We find that sovereign CDS and bond markets are cointegrated. In 57 percent of times, the CDS market leads in price discovery by adjusting before bonds to new information regarding credit risk. In 29 percent of times, bond markets are sources of price discovery. We also find a strong positive correlation of 0.84 between degree of financial integration and bond market information share. The evidence suggests that changes in sovereign credit risk and bond yields are significantly influenced by common external (global) factors while country specific factors play an insignificant role.

Scales and technical efficiencies in Middle East and North African (MENA) micro financial institutions

Purpose - The purpose of this paper is to investigate technical and scales efficiencies of MFIs in Middle East and North Africa (MENA) countries in provision of financial services. This study also aims at tracing the source of inefficiencies. Design/methodology/approach - This paper uses the non-parametric data envelopment analysis (DEA) approach to estimate the production technology for the set of MENA MFIs. The paper uses DEA because it allows us to perform analyses with small samples, which is the case for MENA, and also allows us to calculate Malmquist indexes to characterize productivity changes. Moreover, DEA does not require a production function to calculate the efficiency. It attempts to determine the efficiency of the firm against some imposed benchmark through mathematical programming. Findings - The paper finds low technical efficiency for all MFIs under both intermediation and the production approaches of DEA methodology. This means that MFIs are wasting input resources (input oriented inefficient) and are not producing enough outputs (making loan, raising funds, and obtaining more borrowers per staff). The paper also does not find any improvement in those efficiencies during the period 2000-2005. Originality/value - The study contributes to the existing MFIs literature by pursuing an empirical and decomposition analysis of efficiency by employing two approaches of DEA methodology to trace the sources of inefficiencies which the managers, practitioners and policy makers need to focus on. DEA has been used as a tool to select the right mix of inputs and outputs to assist in tracing the sources of inefficiencies

The random-walk hypothesis revisited: new evidence on multiple structural breaks in emerging markets

We examine whether stock prices in 18 emerging markets follow random-walk or mean-reversion processes in the presence of sudden and gradual multiple structural breaks. Our tests endogenously determined the structural shifts and are more powerful than either the traditional random-walk (unit root) tests or the single structural break tests. In all emerging markets, we find strong evidence for multiple structural breaks. When we use single break tests, the random-walk hypothesis is rejected. However, when we use tests of double level shifts in the mean and make due allowance for multiple structural breaks, the results are consistent with the random-walk hypothesis in the vast majority of the sampled markets. The evidence proves robust to using price indexes whether denominated in U.S. dollars, in local currencies or in real terms, and also to using fractional integration tests. Our results contradict some previous studies for emerging markets which restrict structural breaks to only one-time shift.

Ripple Effects, Long-Run Relationship and Dynamic Corrections among Interest Rate Swap Spreads

This study tests the ripple effects, long-run convergence, and dynamic correlation structures of swap spreads of varying maturities. The authors employ the ARDL bounds-testing approach and the asymmetric DCC methodology on daily data spanning 15 years. The results largely support the presence of the ripple effect and the long-run convergence of swap spreads of differing maturities. However, there are significant variations in the strength and speed of adjustment towards the long-run equilibrium relationship among diverse maturities. Most pairs of swap spreads exhibit strong, symmetric, highly persistent, and time-varying dynamic co-movements, suggesting interdependence and information flow among the swap spreads of varied maturities.

Fundamentals Versus Speculation: What Really Drives Spillovers and Informed Trading in Futures and Spot Markets of Refined Petroleum Products?

In commodities market, the theory of storage suggests that the basis or spread varies with changes in fundamental supply and demand factors. We thus expect these fundamentals, as opposed to speculative trading, to be the primary triggers of volatility in the spot market. Because of structural and functional differences in spot and futures markets, production adjustment cost, sign and sign of the basis, we expect nonlinear price convergence mechanism and time varying volatility. We employ nonlinear and asymmetric error correction model with time-varying volatility to characterize the spot and futures price dynamics of gasoline and heating oil. We show that there is unidirectional and time-varying volatility spillover from futures to spot market since informed trading occurs in the futures markets. We find that error correction process is essentially asymmetric, non-linear, and volatility inducing. The basis account for more than 92% of total volatility suggesting that it is the fundamentals and not speculative trading that drive volatility and spillovers. Moreover, futures prices converge to equilibrium relationship when the basis is positive due to absence of production adjustment costs. We can thus make inference that conventional methodologies that disregard these convolutions in the study of time series dynamics of variables that exhibit mutual stochastic trend may be mis-specified. Our results are robust under different regimes.